Sunday, September 24, 2006

Fixed Asset and Depreciation

Fixed Asset refers to asset that are fixed. (that was helpful wasn't it.) They include stuff like

1) Property, Plant and Equipment
2) Building and Structure
3) Furniture and Fixture
4) Land

Basically they are assets that are held by the company for its business operations and are not intended for sale and are held on for the long term.

Different industries will require different amount of fixed asset (heavy industries like automakers, or transportation sector like railway will need a lot of fixed asset but online co.s will require minimal fixed asset) but recently the general trend is for corporates to reduce fixed asset.

Fixed assets are usually depreciated over 10-30 years to determine its cost impact on the business operation. The value of the fixed asset is then reduced by the amount that was depreciated.

Ok, analogy time. Imagine in the 60s, when policemen still wear shorts, and anyone can buy a car and use it as a taxi, let's say that Ah Gou bought one such car for S$1000 and decided to be a rogue taxi driver for 10 yrs.

So after 1 yr, assuming straight line depreciation and assuming he earned $200 in 1 yr, he would have booked a profit of S$200-S$100 = S$100 of profit (assuming no other costs) and his taxi would be worth S$900.

And after 2 yrs, the taxi will be worth S$800 and by the tenth yr it will be zero. That's straight line depreciation, where the depreciation cost per yr is the same.

See also Crooked Line Depreciation
and Why does the balance sheet balance?
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